Foreign Currency Market Update – GBP / USD Update
The Pound to US Dollar exchange rate rose to its highest level in 2015 last week as American data continued to disappoint and the Bank of England hinted that rates could rise in around a year’s time.
‘Cable’ strengthened from 1.5410 to 1.5580 on Monday as Sterling’s post-election rally continued. And the Pound continued to appreciate against the ‘Greenback’ on Tuesday thanks to some better-than-anticipated UK industrial production data, which showed that output accelerated 0.7% in March compared to calls for just 0.1% growth.
And even though the Pound stumbled against most of the majors, Sterling was able to stretch its gains versus the US Dollar on Wednesday in reaction to the Bank of England’s latest quarterly inflation report. The central bank statement featured a downgrade to 2015 growth prospects (from 2.9% to 2.6%) and only a vague nod towards a rate hike in around a year’s time. However, GBP/USD continued to strengthen, reaching a 2015 high of 1.5760, as traders sold the ‘Greenback’ following an afternoon report showing that US retail sales stagnated in April, which was seen to weigh on American growth prospects and therefore dampen the possibility of a Federal Reserve rate hike in September. British sentiment was also bolstered by the lowest unemployment rate (5.5%) since 2008 and an encouraging rise in average earnings from 1.7% to 1.9%.
‘Cable’ briefly touched a fresh five-month high above 1.5800 on Thursday but a rare upbeat US data release (jobless claims printing at 264,000) put a stop to Sterling’s gains during the afternoon.
But the Pound ended the week on good form as better-than-anticipated UK construction numbers caused economists to upgrade their first quarter growth estimates from 0.3% to 0.4%. The US Dollar ran into trouble when US industrial production was reported to have contracted -0.3%, manufacturing output disappointed at 0.0% and consumer confidence sunk from 95.9 to a seven-month low of 88.6.
The potential for Sterling to continue its recent run of form against the US Dollar this week depends on Tuesday’s CPI result. UK inflation is tipped to remain at 0.0%, but if price pressures drop below zero, as Governor Carney expects them to at some point, then it could curtail the Pound’s gains. Alternatively, a higher result could boost UK sentiment and push GBP/USD towards 1.5880.
On Friday it is anticipated that US inflation will drop down to -0.2%, which could weigh on the domestic currency if markets continue to push back their Fed rate hike bets. However, technical resistance at 1.5880 may be difficult for ‘Cable’ to break through.
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Summary of major upcoming data releases that we think may move the market.